Question

Johnny Inc is currently selling for $50. The firm is expected to pay a dividend of $2 one year from now. Dividends are expected to grow at a constant rate of X% indefinitely. Id the required rate of return of this stock is 12%, what is the growth rate of the dividend (X)? Assume the stock is in equilibrium. 12% 10% 8% 6%

Answer #1

**Solution:**

The price of a share of a firm is calculated using the following formula:

P = D_{1} / ( k_{e} – g )

Where

P = Price of the share;
D_{1} = Dividend per share payable next year i.e., one year
from now ;

g = growth rate ;

k_{e} = Required Rate of return of stock

As per the information given in the question we have ;

P = $ 50 ; D_{1} = $
2.00 ; k_{e} = 12.00 % =
0.12 ; g = To find

Applying the above values in the formula we have

50 = 2 / ( 0.12 – g )

( 0.12 – g ) = 2 /50

0.12 – g = 0.0400

g = 0.12 – 0.0400 = 0.0800

g = 8 %

**Thus the growth rate of the dividend = 8 %**

**The solution is Option 3 = 8 %**

A stock does not currently pay a dividend.
It is expected to pay a dividend of $2.00 five years from today.
This dividend is then expected to grow at a rate of 8% for the
following 5 years. It will then level off and grow at a rate of 5%
indefinitely. For the next 5 years, R = 10%. R = 8% for the
following 4 years and then R = 6% indefinitely. What is the
expected stock price today?

A share of DRV, Inc.,
stock is expected to pay no dividend for the upcoming 3 years.
Then, end of year 4, it is expected to pay a dividend of $10. The
dividend is expected to grow at a constant rate of 4% for two
additional years and then stabilize at 2%.The required rate of
return is 12%. Suppose a DRV stock is selling for $30 today.
1- Calculate the
current expected rate of return on DRV stock
2- Will...

A firm does not pay a dividend. It is expected to pay its first
dividend of $0.36 per share in two years. This dividend will grow
at 8 percent indefinitely. Use a 9.5 percent discount rate. Stock
Value:

New Gadgets, Inc., currently pays no dividend but is expected to
pay its first annual dividend of $5.40 per share exactly 5 years
from today. After that, the dividends are expected to grow at 3.7
percent forever. If the required return is 12.3 percent, what is
the price of the stock today?

Dvorak Enterprises is expected to pay a stable dividend of $7
per share per year for the next 8 years. After that, investors
anticipate that the dividends will grow at a constant rate of 3
percent per year indefinitely. If the required rate of return on
this stock is 12 percent, what is the fair market value of a share
of Dvorak?

The last dividend paid by Coppard Inc. was $1.25. The dividend
growth rate is expected to be constant at 50% for 3 years, after
which dividends are expected to grow at a rate of 6% forever. If
the firm's required return (rs) is 11%, what is its current stock
price?

Stuard products currently pay a dividend of $2 per share and
this dividend is expected to grow at an 8 percent annual rate for 3
years, then at a 10 percent rate for the next 3 years, after which
it is expected to grow at a constant rate of 5 percent rate
forever. What value would you place on the stock if an 18 percent
rate of return were required on the stock?

A stock is expected to pay a dividend of $2.3 one year from now,
and the same amount every year thereafter. The stock's required
return (indefinitely) is expected to be 9.5%. The stock's predicted
price exactly 5 years from now, P5, should be $_______________.
A stock is expected to pay a dividend of $1.2 one year from now,
$1.6 two years from now, and $2.4 three years from now. The growth
rate in dividends after that point is expected to...

2. A stock is currently selling for $50, pays a dividend of
$2.00. Dividends are expected to grow at a constant rate of 3% a
year. Investors require an 8% rate of return.
a. Calculate the intrinsic value (estimated price) for this
stock.
b. If an analyst uses a 10% rule
i. At what price range would this stock be considered to be
overvalued?
ii. At what price range would this stock be considered to be
undervalued?
iii. At what...

Growing, Inc. is a firm that is experiencing rapid growth. The
firm yesterday paid a dividend of $3.80. You believe that dividends
will grow at a rate of 21.0% per year for three years, and then at
a rate of 9.0% per year thereafter. You expect that the stock will
sell for $60.64 in three years. You expect an annual rate of return
of 24.0% on this investment. If you plan to hold the stock
indefinitely, what is the most...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 5 minutes ago

asked 15 minutes ago

asked 20 minutes ago

asked 28 minutes ago

asked 36 minutes ago

asked 57 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago